In this blog post, Perin Gandhi, an Advocate in Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, talks about the impact of GST on the Agricultural Sector.
Introduction
Since the passing of the long awaited 122nd Constitutional Amendment bill i.e Goods and Service Tax (GST) bill by both upper house (3rd August 2016) and lower house (8th August 2016), the news has been hitting the tabloids every alternate day. It has been the talk of the town and now that President Mr. Pranab Mukherjee has also given his assent and signed the bill for its implementation with the ratification by more that 50 percent state assemblies, the bill will soon become a binding law from 1st April 2017. With all the indirect taxes being combined under one taxation system, it will hold a lot of benefit for all the sectors only if it is implemented as per the proposed bill. However, India is not the first country to adopt a uniform taxation system. France was the first country to adopt GST as its indirect taxation structure in 1954. Today, it has spread to around 164 countries in the world which levies GST.
What is GST?
GST has been defined in Article 366 of the 122nd Constitutional Amendment Bill, 2014. Good and Service tax is a combined tax levied on sale, production and consumption of goods and services at the national level. GST merges all the indirect taxes at the central and state level and thereby abolishes the cascading effect on tax. India currently has a dual system of taxation of goods and services, in a sense that tax on activity of manufacture and provisions of service is collected by Union Government and that on sale of goods is collected by State Government. After the implementation of Goods and Service tax all the central taxes such as Excise duty, Service etc and State taxes such as Value added tax (VAT), lottery tax, entertainment tax etc will be subsumed under one uniform tax.
For example : Product X is produced in a factory. As soon it is released from the factory, excise duty has to be paid on that product. Further when that product X is sold within the state, Value added tax (VAT) has to be paid on it. This leads to dual taxation on the same product which is known as cascading effect.
This newly introduced taxation system would also take the form of ‘Dual GST’ which would be levied by the respective central and state government. The said dual good and service tax would comprise of 1) Central Gst (CGST), 2) State Gst (SGST) and 3)Integrated Gst (IGST). Presently, goods and services are taxed in the state where it is produced but introduction of GST will change the stage of taxation and after its implementation the goods and services will be taxed in the state where it is consumed.
Earlier in agricultural sector…and After GST…
Agricultural sector has been the root of Indian economy and it contributes to around 16% to the GDP. Over 53 percent of the rural livelihood depends on this sector as their primary means of livelihood. The implementation of goods and service tax in agricultural and food industry will have an impact on all the sections of the society. Food is a large portion of spending and food basket consumes around 40%- 60% of the earning of a common citizen and increase in the price of food items would result as a major burden on the family. Food industry is price sensitive and it has direct impact on the lower income earners and the poor. Food includes items like meat, fish, poultry, grains, cereals, dairy products and milk, fruits, vegetables etc. Earlier many food items were exempted from CENVAT and items like food grains and cereals were taxed at 4 percent under the state Vat. Exemption under the State vat is strictly restricted to the unprocessed food items like meat, eggs, fruits, vegetables etc.
From industry experts to small farmers to common citizen all are quite hopeful to get a fruitful result from this GST regime. Agricultural goods are perishable in nature and thus are often influenced by the amount of time taken in its transportation. The implementation is expected to boost the agricultural market as taxation under a subsumed single rate would make the movement of agricultural commodities hassle free as the products would be able to reach places via trucks in a better way. Interstate trading of a particular product often is subjected to various taxes, permission, license required for different states at every point of their transaction. This had often created hindrance in trading of products across the country for many traders in the past. So implementing GST would be the first step towards liberalizing the marketing of agricultural products and creating a smooth transaction of goods. Good quality products which are manufactured or produced in one part of the country can easily find a market place in other part of country in the absence of multiple taxation burden. One of the other positive factor that GST would bring in is that it would make the agri- machineries affordable to the small and marginal farmers in India which was beyond their reach due to high excise duty on the machinery. This ease in the transportation of agricultural products will not only save time and avoid wastage in case of perishable goods but will also improve the marketing and virtual market growth. Agricultural products were always subject to diversity in the taxation rates so a single rate of goods and service tax would benefit the national agricultural market and help the farmers and traders to sell their products in any part of the country and receive the best price for their product. GST will also include in its ambit tax related to trading in oilseeds, cereals etc which previously were outside the tax structure and thus will benefit the consumers and processors by eliminating the negative impact of price on the trade of such products. The impact of GST would also depend upon the size of the business. The single rate of GST for certain food items could still lead to double the taxation burden even though they were exempted in the previous taxation system. So a need for clarity on the exemption of food items is required to be listed. The proposed GST rate should provide consistency in tax of processed and unprocessed food items so that processed food comes within the reach of all the consumers. The slab for GST rate of processed food should be different for different income group to make the benefit of such food available for all the consumers. To keep the base of GST broad, to limit the price of consumable food, the rate of GST for unprocessed food items like fresh fruits, meat, egg, vegetables etc should be kept lower. Lower rate will give an alternative to the consumers to buy the unprocessed food and then have it processed themselves in case of higher rate applicable to the already processed food available in the market.
Vijay Setia, a well known Basmati rice producer and a former president of All India Rice Exporters Association had a view that multiple tax system was a route to cheat people. Introduction of GST would welcome more transparency in the system as there would be a common market in the absence of CST and entry tax.
There are also speculations that implementation of goods and service tax would hike the price of agricultural products to between 0.61% to 1.18%. The terms of trade in respect of agricultural sector is also expected to improve post GST. Some experts have analyzed that hike in the price of agricultural products would be beneficial for the retailers but not for the farmers whereas some are of the opinion that price rise would not only benefit the farmers but will contribute to economic growth and open new job opportunities for many in the agricultural as well as non agricultural sector thus bringing down inflation. It is also expected that consumers will be at the receiving end due to rise in price as presently they are benefiting from the low indirect tax while soon they will face higher tax under GST. However, to some extent poor will still remain secured through Public Distribution system even though there would be rise in price of food. Whether hike in price is a positive impact or a negative impact, only time will tell. Mr. Pritam Shah, MD at Parag Milk Food, expressed his concern “GST is not beneficial for agricultural commodities and allied sector but might benefit the engineering sector. Currently, there is no tax to procure milk from farmers. We only pay 2% central Vat on sale of milk powder to a company. When GST get implemented, the tax can be 12.5% or 15% or 18%. There will be a straight cost hike in milk and milk product prices.” India ranks first in milk production covering around 18.5% of the world production. Its annual production for the year 2015-2016 amounted to 160.35 million ton and records an increase every year, and milk being a basic necessity in many households, an increase in the price would not be readily welcomed by the consumers.
On the other side, apart from milk, tea is the most consumed product around the country. The annual consumption of tea in India is around 950-1000 million kg. A Senior Industry Executive was of the view that tea industry should either be fully exempted from GST or the new GST rate should be kept at par with the current tax rate of 5-6 %. Also the concessional tax rates for teas sold through auctions should be kept intact even after the implementation of GST, in the absence of which price of tea will be costlier.
Conclusion
The country is eagerly looking out for the roll-out of GST, as the regime introduces destination based taxation. Goods and Service tax is a good initiative to summarize the taxation and encourage the ease of doing business in the agricultural sector. However, Indian agriculture and farmers should be given the same freedom just like any other economic agents, unless that is done 50 percent of the country will still be legally discriminated in the GST regime. Therefore, it is imperative that the government makes effort to make law clear so that all the sectors and economy benefits as a whole.
